Is FD a Wealth Destroyer?

Fixed Deposits are the most trusted investment options among Indian households. Nearly 95% of the Indians prefer to park their idle funds in the FDs. Why? Fixed Deposits offer the lowest returns as compared to other investment avenues. They have a specific lock-in period, and the investor needs to bear a penalty in case of early withdrawal. After all these known reasons, people still choose FDs over stocks, bonds or Mutual Funds. Let us discuss why.

Fixed Deposits are one of the safest investment avenues whose returns are unaffected by market fluctuations. Additionally, it allows people to park their savings and use it for wealth creation. Having an FD can help you get out of financially challenging situations. 

Let’s overview how FD works and how it can help you in wealth creation.

Fixed Deposits in India: An Overview

For individuals unwilling to take risks and want to earn returns on their capital, Fixed Deposits are for you. All the banks and some other financial institutions in India offer the facility of opening FDs with them. 

An FD account is where you park your money on a pre-decided interest rate for a specific time. The bank or the financial institutions where the FD is opened pays a fixed amount of interest and repays the principal amount on maturity of the FD.  FD also has the  flexibility of easy withdrawal at any time. 

The tenure of FD may differ depending on the investor’s choice and ranges from a few days to several years. Ideally, the longer the tenure, the more interest you will earn.However it can happen that some banks offer the highest return for a set period and offer a lesser rate for any tenure which is more than that period. Additionally, for senior citizens, the interest offered is more.  

In India, FD is considered the safest investment option to earn decent returns. Since the returns are not market-linked, it has gained more trust among individuals and holds a sizeable portion of the investors’ portfolio.

Reasons Why Fixed Deposit is Preferrable

It’s never too late to invest in FDs. Currently, the FD interest rates are at their highest in over a decade and can be advantageous for you to beat inflation. With small finance banks offering returns as high as 9.5%, this is the best time to invest in FDs

However, before investing, you must know why FDs can help generate wealth. The following points will help you understand the features and benefits of investing in FDs:

• Guaranteed Returns:

The returns of Fixed Deposits are pre-determined, with the banks insuring the customers that they will get promised returns. Hence, the investor assumes no risk. 

Moreover, the returns banks offer on FDs are comparatively higher than the savings account.

• Loan Against FDs:

You can use FD as collateral to avail of a loan. Most banks offer loans of up to 90% of your FD amount without meeting any additional eligibility. The advantage here is that you can finance your needs without losing interest on your FD.

• Risk-free:

Fixed Deposits come with low to minimal risk as the returns are not market-linked. Also, if the interest rates are reduced by the RBI in between your investment tenure, even then, your returns remain unchanged until maturity.
Additionally, a DICGC insurance of up to Rs. 5 lakh is offered to all the FD accounts in case of bankruptcy or bank default.

• Choice of Tenure:

You can invest in an FD according to your suitability. The tenure options available range from a few days to several years. If you keep an amount idle for 3 months, you can open a Fixed Deposit account and earn more returns than a savings account.

• Unaffected by Market Fluctuations:

FD returns are fixed and are not affected by the market conditions. Hence, it becomes a risk-free investment offering modest returns.

• Tax-free Returns:

FDs even offer a chance to save taxes by investing in Tax saver FDs with a minimum tenure of 5 years. 

Final Word

Fixed Deposits are great for keeping your idle capital at work and making money on money. Though the returns might not be as lucrative as equities or mutual funds, FDs are risk-free and guaranteed (this is only applicable for FDs amounting to INR 5 lakhs per account). You can start investing in FDs through any of the banks. Many online platforms also offer the facility to open FDs without opening a savings account.

Most of the Indians are risk-averse and prefer to invest in avenues with fixed returns. Now that you know how FDs are beneficial, you are advised to consider all factors and choose to invest in instruments that suit you the best.

Happy Winting!